A brief study on business of CCL Products Ltd. Views invited.
CCL Products Ltd. Is engaged in processing of coffee, it procures green coffee and turns it into instant coffee. Around 95% of finished product is sold as white label to global coffee brands and retailers for their private labels. The co. also ventured into selling its own brand of coffee, âContinentalâ, in India.
The co. produces 3 varieties of coffee using different processes, i.e.,
1). Spray Dried Coffee: Itâs the most common and cost-effective variety of coffee produced. Itâs also the most common variety of coffee consumed. Itâs also used in chocolates and ice-creams and various other products to give flavour of coffee.It sells for around USD 5/kg.
2). Freeze Dried Coffee: Itâs a premium product and retains the flavour and aroma of coffee to a great extent, much more compared to spray dried variety . The procedure to manufacture the same entails high capital expenditure and thus this variety sells for around USD 8/kg. This variety of coffee is quite popular in European countries.
3). Liquid Coffee: Itâs again a premium product and retains most of the falvour and aroma. This variety of coffee is consumed only in Japan and Korea. The co. is not selling any of liquid coffee now but has capacity for the same and has done extensive sampling with customers in Japan and Korea both.
The co. has two plants, at Guntur in AP, India with a capacity of 25K MT and recently commissioned (Fy14), high-tech one in Vietnam with a capacity of 10K MT with basic infrastructure ready to take up to 20K MT, only investment required in future would be for machinery.
CCL Products is a pure processor and doesnât own any coffee plantations. The co. procures green coffee from Chikamagalur in Karnataka, india as well as imports premium variety like Robusta and Arabica from Vietnam and Ethiopia respectively. The green coffee/raw material constitutes approx. 80% of total cost and the co. works at cost-plus model. The mark-up is 20%. The co. does not stock raw-material and places the order for the same as and when the customer places an order for coffee, effectively insulating itself from any raw-material cost fluctuations. This also reduces working capital requirement as suppliers are paid later however no advance is received from the customers too. Coffee trades in USD worldwide and the since the co. exports more than 90% of the produce in instant coffee form, there exists a natural hedge to a great extent.
The co. has more than 100 customers spread out across 70 countries. The co. faces competition from processors in Brazil but CCL Products has strong relationship with its customers lasting for 15-20 years built on successful completion of orders, reliability on quality and trust resulting in vey high customer stickiness. The relationship is also strong because customers who market the instant coffee their brand demand consistence in quality.
The co. recently added capacity by adding a 10K MT capacity plant in Vietnam. The plant is state of the art with high degree of automation. The plant is located in highest green coffee producing state in Vietnam and thus helps in easy availability of raw-material. The co. also saves approx. USD 60/MT on transportation viz-a-viz India. The biggest advantage from Vietnam is exemption of income-tax for first 5 year of operations. Plus, Vietnam enjoys MFN status with most countries and thus its advantageous to customers due to low duty structures.
The co. ventured into selling its own brand of coffee, âContinentalâ, in Fy14. The co. enjoys double margins on EBIDTA basis in branded business viz-a-viz its processing business. The product was launched only in AP and clocked Rs 40 cr worth of sales in first year itself. Management indicates strong recall of the brand and plans to launch âContinentalâ all over India in a staggered manner. It has already launched the product outside AP, in packets where coffee consumption is high. The instant coffee market in India is dominated by Nescafe which does sales of Rs. 1400 cr. and Bru which does sales of Rs. 1200 cr. The instant coffee market is growing at 12-13% in India due to increased exposure to coffee among Indians due to the budding caf© culture, especially youngsters. Southern India accounts for approx. 80% of instant coffee consumption in India and AP constitutes approx. 20% of entire India according to some news articles. The co. considers Nescafe as its main competition as Bru has a different variant with Chicory added to the coffee. The co. also sells a product with Chicory mix. The co. is not doing any promotions except in-store promotions and relying on word-of-mouth. The co. also plans to provide coffee to organized retailers in India to sell under their private labels and has already tied up with reliance Retail.
The co. plans to double sales in approx. 3 yearâs time on back of added capacity and its branded foray, aims to capture approx. 20% market In India. The co. is also aiming at higher profitability levels due to increased benefits from Vietnam and high-margin branded business. The co. sold 16K MT in Fy14 and aims to sell 20K MT in Fy15. A solid reputation among customers and high customer stickiness act as a moat around the business and plus, acceptance and strong recall of its âContinentalâ augur well for the co.
Disclosure: I hold stock inthe co.